Taxes & Corruption - comparative figures/estimate for Karnataka?

Last week, GoI released some data on Direct Tax collections. I thought why not compare them against estimates of "alleged size" of corruption in Karnataka. Why should we compare only Direct Tax? Because to me, this corruption thing we hear about is like corporates and individuals paying additional direct tax. Lets start with data on Direct Taxes, source PIB Release ID 74516, Aug 12 2011.

181% growth in refunds compared to last year !! So Net collections have reduced.

Rs.53,863 crore as against tax refund of Rs 19,021 crore made in the same period during last fiscal !

No data yet on Karnataka's share, but we could divide by 15 (as KA is big state, with IT hub Bangalore) to get an estimate. That comes to about Rs 5200 Crore. Also, though most tax collection happens during these 4 months, lets leave 15% or so for rest of the months, shall we. All added up, full year direct tax collections from state of Karnataka could be around Rs 6000 Cr.

Now, where do we get data on "alleged size" of corruption in Karnataka. Lets refer to ex-IAS Vivek Kulkarni's famous article in Hindu Business Line (dated: Oct 28, 2010, link here if you missed it back then).

Conservative estimates show that, if all possibilities are implemented, a State government the size of Karnataka should yield Rs 3,000 crore per year.

3000 Crore per year. Vivek has used data and guesstimates to produce this number, for ex:, this from real-estate sector:

Construction permits and land registration are yet another big source of money. About 12 million sq ft of new concrete is built in Bangalore alone, every year. Karnataka has over 18 cities where real estate is booming. While the stamp duty and registration charges could be 7.5 per cent, the bribes can be at least 1 per cent. The Government collects over Rs 3,500 crore in official revenues. This implies that bribes could be close to Rs 500 crore.

A small check here - how conservative is this 500 Crore number? Averaging numbers from a few sample land deals I know (2nd hand info), For Rs 25 lakh worth transaction, value showed was Rs 5-6 lakhs, duty paid ~ 40K, and then 20K+ in bribes. The Rs 3500 crore number Mr Vivek Kulkarni has used are "declared values". 20K is 4% of the declared value. Now, since many big builders these days may be declaring close to real values, 4% estimate would be a bit high, lets lower it to 2% to account for good builders of Bangalore :)

So, we could revise the Rs 500 Cr estimate to about Rs 700 Crore. Next, if we apply the same adjustment to all his other "conservative" estimates. (700 Cr is 40% more than 500 Cr), we can bump up Rs 3000 Cr to Rs 4200 Crore.

So, yes, based on many approximations, but we are talking Rs 6000 Crore of direct tax collections vs Rs 4200 Crore (per year).

Caveats? Of course many. But we can see that the "indirect tax" we pay is sort of close to the direct taxes we pay to the central government.

Notice that revenue has declined since 07-08. Mainly because 1) stamp duty was reduced from 7.5% to 6% in early 2009 and 2) "slump" since 06-07, when 14 lakh documents were registered, and then declined next 3 years.

Read in a newspaper last week about an allegation of corruption (kick back specifically) against an ex-CM. the project amount was mentioned as 1500 Crores. And kick back amount 'as per the allegation' is 15 Cr. That would be 1% of the project value.

This study from Reetika Khera, IIT-Delhi has found a lot of mention in recent articles on corruption. Here is the link. It estimates the proportion of grain "diverted" from the Public Distribution System (PDS) to the open market for several years in the past decade, by matching state offtake figures published by the government, with household purchase reported by the National Sample Survey (NSS).

Note on diversion estimate for Karnataka:

Note also that among the so-called "functioning" states, two states (Maharashtra and Karnataka) have very high levels of diversion (just over 40%). This is also true of some of the "reforming" states where in spite of improvement in recent years the level of diversion remains high at the end of the period.

ET carried a peice today (Aug 25) that is titled "Anti-Graft Campaigns spook realty sector". Since we often hear real estate is the dirties of them all as far as corruption goes, no surprises there. But but but, there are some numbers mentioned.

The size of construction industry ... 12.1% of India's current GDP of $1.8 trillion. Of this about 60% or $100 billion would be in black money.

There are two corruption links here, 1) black money generated through corruption parked in real estate companies by netas or businessmen. 2) corruption that builders etc participate in for approvals etc.

Quote by Lalit Kumar Jain, president of CREDAI

If it (Lokpal Bill) really has an impact on the approval system, reducing the time ... and corruption, it can reduce the sale price of properties by at least 25%

'at least 25%'. So that is how much you and me are paying as "corruption tax" when buying our homes.

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